NCPA - National Center for Policy Analysis

Bracket Creep And The Budget Surplus

July 11, 2000

The common explanation for the federal budget surplus is that the booming U.S. economy is swiftly increasing tax revenues flowing into the Treasury. Economists say that while that is true so far as it goes, an unheralded factor is that American taxpayers are being catapulted into ever higher tax brackets.

Though tax brackets are indexed to remove the impact of inflation, they are not indexed to control for the growth in real wages.

  • The number of Americans earning more than $100,000 leapt to 8.3 million in 1998 -- up from 7.2 million in 1997.
  • But their greater prosperity pushes those Americans into a higher marginal tax bracket -- to 28 percent from 15 percent.

Then there is the impact of the Alternative Minimum Tax -- which was originally put in place to make sure the super-rich paid at least some taxes. But the ATM wasn't indexed for inflation when it came into being 30 years ago.

  • So 828,000 more Americans were subjected to the ATM in 1998 -- a 40 percent increase over the previous year.
  • Middle-class Americans are increasingly being ensnared by the ATM -- as evidenced by the fact that 27 percent of those caught by it in 1998 earned less than $100,000.
  • Figures from 1997 show that 14,666 taxpayers with adjusted gross incomes under $10,000 were subjected to the ATM.

So some of the budget surplus can be attributed to the speedy growth of federal income-tax payments -- which climbed to 9.9 percent of gross domestic product in 1999 from 7.8 percent in 1994. That's the highest level of tax take in the post-war period.

Source: Editorial, "Government Greed," Wall Street Journal, July 11, 2000.


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